That sucking sound from across the Atlantic is the echo of Bob Diamond’s attempt at explaining why Barclays fiddled with the LIBOR, and what is now becoming a predictable litany of excuses from bankers as to why they are not accountable for the “culture of cynicism” which has given us Lehman Brothers, Bear Stearns, The Reserve Fund, and all those other dubious contributions to the history of the Great Recession of 2008.
Excuse Number One: “I didn’t know.”
Diamond: “He said he only learned the true extent of the scandal this month, and felt “physically ill” when reading incriminating emails from traders.” [BBC]
Remember When? Mr. Ken Lewis, CEO Bank of America was not advised of the state of Merrill Lynch’s Q4 report prior to advising the Board of BoA to accept the sales terms. “Mr. Lewis was aware of no red flags suggesting the considered judgment of these professionals was was incorrect, based on inadequate information, or should be questioned for any reason.” [ProPublica doc]
Rock meets hard place — either the handsomely compensated CEO is making the Big Bucks because he or she is managerial gold, capable of calm in the turbulent economic waters, willing to be accountable (after Sarbanes-Oxley) for financial policies and transactions, and a gifted hand on the rudder of the corporate craft, OR the CEO is sadly isolated from the real news that should have made it through the corporate grapevine but was lost along the way among the multitudes? So, which is it? One can’t have the Buck Stopping Here only in good times. However, it seems when the rains come the Buck is magically transformed into an eukaryotic cell replicating so quickly that there are enough bucks to scatter upon almost every desk in the firm.
There’s another problem with Mr. Diamond’s response. If he didn’t know “it,” then he didn’t “know it” for a very long time. Consider this article from Bloomberg News May 29, 2008:
“Banks routinely misstated borrowing costs to the British Bankers’ Association to avoid the perception they faced difficulty raising funds as credit markets seized up, said Tim Bond, a strategist at Barclays Capital.
“The rates the banks were posting to the BBA became a little bit divorced from reality,” Bond, head of asset- allocation research in London, said in a Bloomberg Television interview. “We had one week in September where our treasurer, who takes his responsibilities pretty seriously, said: `right, I’ve had enough of this, I’m going to quote the right rates.’ All we got for our pains was a series of media articles saying that we were having difficulty financing.” [Bloomberg] (emphasis added)
A strategist at Barclays Capital is quoted in an international news source in 2008 about LIBOR fiddling…and Mr. Diamond didn’t find out about it until 2012? This must qualify for the slowest corporate grapevine in the history of corporate grapevines. It’s a wonder how they ever get a birthday celebration together?
Excuse Number Two: “It’s just a few bad apples.”
Diamond: “He said that just 14 traders were to blame and that they had tainted the reputation of the 140,000 people who work for Barclays. He repeatedly stressed his “love” for the bank and its pride in what it has done.” [Guardian]
Remember When? “We had one person who was very earnest about what he had written, but 30,000 people who felt the opposite,” Blankfein said, referring to other Goldman employees, “and clients who were unbelievably supportive.” Lloyd Blankfein in response to an article about the culture at Goldman-Sachs. [HuffPo 2010]
It really doesn’t take very many apples to sour the barrel. In this instance the unfortunate tale of Barings Bank and Nick Leeson should be recalled. Barings was established in 1762, it had financed the Napoleonic Wars, the Erie Canal, and the Louisiana Purchase. In 1995 it was gone, sunk beneath a £827 million really bad bet by trader Nick Leeson. Yes, there were good people at Barings, but there was also the incredibly unlucky and evidently unsupervised Mr. Leeson. Yes, there are good people at Barclays, but there are also the happy fingered people sending e-mails to one another like the following:
“Dude. I owe you big time!” wrote one trader to a submitter. “Come over one day after work and I’m opening a bottle of Bollinger.” Another Barclays trader emailed a submitter: “If it’s not too late low 1m and 3m [rate] would be nice, but please feel free to say ‘no’…Coffees will be coming your way either way, just to say thank you for your help in the past few weeks”. His friendly submitter responded: “Done…for you big boy.” [IBT]
The Barclays correspondence is rather reminiscent of Kevin and Bob from Enron, remember Grandma Millie?
Kevin: So the rumor’s true? They’re [expletive] takin’ all the money back from you guys? All those money you guys stole from those poor grandmothers in California?
Bob: Yeah, Grandma Millie, man. But she’s the one who couldn’t figure out how to [expletive] vote on the butterfly ballot.
Kevin: Yeah, now she wants her [expletive] money back for all the power you’ve charged for [expletive] $250 a megawatt hour. [NYT]
Steven Pearlstein described this culture in a 2010 business column:
“It’s been decades since the old investment and banking cultures gave way to a trading culture in which the driving principle behind every dollar traded or leveraged is to use whatever advantage you have to “rip the face” off some other trader, brag about it on the interoffice e-mail and take 20 percent off the top as a bonus. Raising and efficiently allocating capital for businesses and households are mere pretexts for a financial system that is now focused on reaping profits from high-frequency trading and sales of purely speculative instruments like synthetic CDOs.”
Mr. Pearlstein’s analysis could apply as easily to Barclays today as to Lehman Brothers not so long ago. No, Wall Street and The City aren’t going to revert to the days when investment banking was a client based enterprise, not when trading is more profitable than capital allocation. However, that doesn’t excuse unethical, dishonest, self-serving behavior even if the practices aren’t technically illegal.
Excuse Number Three: “It’s the regulator’s fault, they should have stopped us.”
Diamond: “Barclays had raised concerns with the regulators about other banks being involved, he said. “There was an issue out there and it should have been dealt with.” [Guardian]
Remember When? The Valukas Report came in on the Lehman Brothers debacle? (Especially in reference to Lehman’s risk controls.)
“The SEC did not know about the practice,” said Valukas in prepared testimony. “But it is difficult to understand why not. In the post-Enron world, it would be logical, if not obvious, to ask public companies to explain their off-balance sheet transactions. I saw nothing in my investigation to suggest that the SEC asked even the most fundamental questions that might have uncovered this practice.” [ProPublica]
Not that the SEC covered itself in glory, but it should be noted that the agency relied on Repo 105 reports that came from Lehman Bros. auditors. Apologists flocked to the conclusion that if the SEC, or if the almost thoroughly captured OCC, or even the CFTC, had ridden into the fray in 2007 all might have been set aright. Yes, and we saw just how far that got CFTC chair Brooksley Born in 1999. [WaPo] The former CFTC chair certainly earned her “Cassandra” appellation, always to be right and never to be believed in time to prevent a catastrophe.
If Mr. Diamond is to earn his compensation on his way out of the Barclays premises in the City, then the least he could do would be to come up with some excuses and rationalizing that hasn’t already become hackneyed and common on Wall Street.
Background reading: “Why I Am Leaving Goldman Sachs,” Greg Smith, New York Times, March 14, 2012. Bank of America Merrill Lynch Suit Lewis Motion, Pro Publica, documents. Cora Currier, “How Bank of America Execs Hid Losses…,” Pro Publica, June 4, 2012. Ray Fisman, “The Real Reason CEO Compensation Got Out Of Hand,” Slate, May 11, 2009. Steven Pearlstein, “Wall Street’s know it alls can’t tell right from wrong,” Washington Post, April 23, 2010. Joris Luyendijk, “Barclays emails reveal a climate of fear and fierce tribal bonding…” Guardian, June 28, 2012. Mary Shapiro, “Preventing Another Crisis…,” Investment News, March 25, 2012. Finch & Gotkine, “Libor banks misstated rates,” Bloomberg News, May 29, 2008.